Taxes and Dependency Exemptions (Child Tax Credit)

The dependency exemption has been replaced by the child tax credit. The tax exemption directly reduced a parties’ taxable income. A credit reduces the parties’ tax liability. In other words, a dependent exemption is the income you can exclude from taxable income for each of your dependents (typically your children). Under the old tax code, parties could exclude $4,050 for each dependent. Now that number is $0, but, if eligible, parties may claim a child tax credit.

The child tax credit is a credit that offsets the taxes you owe dollar for dollar and is available if you have a child younger than age 17 at the end of the year, and that child lived with you for at least one-half of the year. Because it’s a tax credit, it directly reduces the amount you owe the IRS. So, if your tax liability is $3,000 but you’re eligible for, say, $800 of child tax credit, you now owe $2,200.

The Child Tax Credit under 2018 tax reform is worth up to $2,000 per qualifying child. The age cut-off remains at 17 (the child must be under 17 at the end of the year for taxpayers to claim the credit). The refundable portion of the credit is limited to $1,400. This amount will be adjusted for inflation after 2018. The earned income threshold for the refundable credit is lowered to $2,500. The beginning credit phaseout for the CTC increases to $200,000 ($400,000 for joint filers). The phaseout also applies to the new family tax credit. The child must have a valid SSN to claim the nonrefundable and refundable credit.

The credit is refundable in the 2018 tax year for up to $1,400. That means that if you’re eligible for $3,000 in tax credits but only owe the IRS $2,000, you will get the $1,000 difference refunded to you.

As of 2018, the phase-out begins for married taxpayers at a pretty significant $400,000. They can earn this much without losing any of their Child Tax Credit. The phase-out begins for all other taxpayers at $200,000. Each $1,000 earned over these amounts reduces the Child Tax Credit by $50. These phase-outs apply to the Family Credit as well.